Suppose the government decides to issue a new savings bond that is guaranteed to

Question

Suppose the government decides to issue a new savings bond that is guaranteed to double in value if you hold it for 20 years. Assume you purchase a bond that costs $25. a. What is the exact rate of return you would earn if you held the bond for 20 years until it doubled in value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If you purchased the bond for $25 in 2017 at the then current interest rate of.23 per year, how much would the bond be worth in 2027? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16) c. In 2027, instead of cashing in the bond for its then current value, you decide to hold the bond until it matures in 2037. What annual rate of return will you earn over the last 10 years? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Rate of return b. Value of bond c. Rate of return

Explanation / Answer

A) Rate of return = [(2 * 25) - 25] / 25 * 100 = 1 or 100 %

B) Value of bond = 25 * (1 + 0.0023)^10 = 25.581

C) Annual rate of return = [2 * 25 - 25.581] / 25.581 * [1 / 10] = 0.0955 or 9.55 %

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